What you should know before you sign up for the creditor insurance on your mortgage
Congratulations. It is a very exciting time, you just bought a new home for yourself and your family. You have met with your lender/bank and they have suggested creditor insurance or what is sometimes called mortgage or loan insurance.
The purpose of insurance is to provide a peace of mind in the case of your death, relieving your loved ones of financial burden and stress. Creditor insurance is designed to pay off the balance of your mortgage or loan to the lender/bank in the event of your death. It is misleading because creditor insurance is positioned as protection for your family, but it really protects the lender. There is another option and it does protect your loved ones. It is called term life insurance.
Before you sign on the dotted line it is important to know the differences between creditor insurance and term life insurance. This will help you make an informed decision on what you will be paying for and what best suits your needs.
| CREDITOR INSURANCE | TERM LIFE INSURANCE | |||||
| Control/ beneficiaries | The lender/bank receives the benefits from your policy. No money will go to your family. | You decide who your beneficiaries are. They will receive the money from the policy upon your death. | ||||
| Flexibility and Value of Coverage | There is no flexibility in coverage. The benefits are used to pay off your remaining debt with the bank. The value of your insurance coverage is directly related to the amount remaining on your loan or mortgage. | Your beneficiaries are in control of what they do with the money. It is their decision what they use it for; to pay bills or a portion of or all the mortgage or to take time off work. The value of your life insurance remains the same for the entire term of your insurance. For example, if you purchased term insurance for $500,000, your beneficiaries will receive $500,000 no matter what you still owe on your mortgage. | ||||
| Portability | Coverage is not transferable, it is tied directly to the mortgage. If you change lenders or sell and buy a new home, the policy is terminated and you will need to apply for a new policy. | You own and control this personal life insurance policy. It is not attached to your mortgage, so it stays with you regardless of whether or not you move. | ||||
| Cost | Premiums are typically higher in comparison to those for term life insurance. It is important to note that premiums do not decrease because you pay down your mortgage. Premiums will also increase with every re-application of your mortgage. | Premiums remain unchanged for the length of your term. Depending on your age and health premiums can be significantly more affordable. There are also often preferred and discounted rates for eligible applicants that can save you even more money. | ||||
| Underwriting and Eligibility for Claim | These policies use post-claim underwriting, which means the insurance company will look more closely at your medical history after your death. If previous medical conditions are found when you signed the documents, then your claim could be denied, no matter the premiums you have paid. | All underwriting is done before the policy is written. With life insurance policies, you are often required to provide blood and urine samples along with a more in depth medical questionnaire at the time of application. When a claim is made, the benefits should be received without further investigations. | ||||
| Ease to attain | This insurance is simple and easy. It is most often set up at the time of signing for your mortgage with a few simple health questions. Premiums are added onto your mortgage payment which can slow down re-payment of the loan. | Applying for life insurance can be a slightly more involved process, but your life insurance advisor can make that process much easier. Premium payments are made to the insurance company instead of the bank. |
What else should you know?
- Creditor insurance is NOT mandatory
- If you already have creditor insurance for your loan or mortgage at the bank, but you want to make a change to a personal term life insurance plan, YOU CAN. There are no costs associated with cancelling creditor insurance
- Before cancelling your creditor insurance make sure to follow these steps to ensure continued coverage:
- 1. With your licensed life insurance advisor, apply for the appropriate term life insurance policy.
- 2. Receive approval for your new insurance policy.
- 3. Once your term policy is in force, you can contact the bank and request them to cancel your creditor insurance.
A term life insurance policy can save you money and its flexibility and design let you maintain control over the policy allowing you to better protect your family.
Photo by: Tierra Mallorca on Unsplash.